Editor's Note:

If you have not yet read tonight's market wrap, please do. If last week wasn't bad enough for the stock market we are now facing a very uncertain Monday. After the closing bell on Friday the credit rating agency Standard & Poor's announced they were downgrading the U.S. credit rating to AA+ from AAA. While this event has been considered a possibility for months no one was expecting it so soon after the debt ceiling extension was passed.

There is no way to gauge just how violently the stock market might react to this news. We are expecting the U.S. market to gap down lower at the open on Monday but how far the selling pressure takes the market down is anyone's guess. The S&P 500 is already down -10.7% in just the last two weeks. At the low on Friday the index was down -13.1% in two weeks. It is too late to buy puts on the market. The market is already oversold and stocks will gap open lower on Monday.

Instead of trying to play the downside we would rather focus on trying to play the oversold bounce that should appear pretty soon. It could be intraday on Monday or the oversold bounce could be on Tuesday after the FOMC meeting. Trying to predict the future is a tough gig. Part of the challenge is your stop loss placement. If you open bullish positions at the open on Monday morning (assuming a gap down) then where do you put your stop loss? You don't know if the market will see a -2%, -5%, or -10% move on Monday. We do want to keep in mind that a number of analysts and market pundits believe that a U.S. credit downgrade has already been anticipated by Wall Street. Thus while the market should see a flush lower on Monday morning it may not be as bad as if this had occurred several days ago.

The smartest trade on Monday is probably no trade at all. Art Cashin had a great quote on Friday. "Sometimes it's the second mouse who gets the cheese!" The best play may be to let someone else step in front of this train and we can pick an entry point once the dust has started to settle. Trying to catch a falling knife is dangerous. Trying to catch it with options can be deadly.

We are going to go ahead and list some bullish trading ideas but consider these lottery ticket style trades. If we win, we should win big. If we lose, we could lose it all. Keep your position size very small.

FYI: In addition to tonight's new candidates here's a list of stocks that should offer some opportunity for a bullish bounce and I would be tempted to buy calls on another dip: HFC, PM, IBM, SM, ANF. I also like AAPL and AMZN but their options are pricey.

- James


NEW DIRECTIONAL CALL PLAYS

Cabot Oil & Gas - COG - close: 66.87 change: -0.64

Stop Loss: To be determined
Target(s): 69.75, 72.00
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
COG still has a long-term bullish up trend in spite of the market's massive sell-off in the last two weeks. Back in May and June of this year investors were buying the dip near COG's rising 50-dma. They bought the dip again at the 50-dma on Friday. I will point out that on the weekly chart the last two weeks look like a potential top. This past week painted a big bearish engulfing candlestick pattern but that doesn't mean COG can't see a strong bounce.

The low on Friday was $64.58. I am suggesting we buy calls on Monday if COG dips to $64.75. Please note that this is an aggressive, higher-risk trade. We are not using a stop loss on Monday. The Aug. $70 call will be less than $2.00 at our trigger and the Sept. $70 call could be under $3.00. I am suggesting we keep our position size small to limit our risk. After we see where COG closes on Monday, then we'll consider where to place a stop loss.

FYI: August options expire in two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

Buy-the-Dip Trigger @ $64.75

- Suggested Positions -

buy the AUG $70 call (COG1120H70)

- or -

buy the SEP $70 call (COG1117I70)

Annotated Chart:

Entry on August x at $ xx.xx
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on August 6, 2011


Green Mountain Coffee Roasters - GMCR - close: 95.99 change: -6.76

Stop Loss: To Be Determined
Target(s): 99.50, 104.00
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GMCR has delivered significant gains this year thanks in part to lots of short covering. Technically traders have been buying dips near the rising 40-dma. Look at the daily chart. The S&P 500 has been falling for two weeks straight. GMCR has only been correcting for two days. Friday's drop did not even hit the 40-dma. Instead the stock managed an intraday bounce after it came close to filling the gap from late July.

The low on Friday was $92.13. I am suggesting we use a buy-the-dip trigger to buy calls at $92.25. More conservative traders may want to hold out for a dip to $90.50 or the 50-dma near $88.50 instead as your entry point.

This is a higher-risk, speculative trade. We're not using a stop loss on Monday. We'll wait to see where GMCR closes on Monday night and then consider a stop. Use small positions to help limit risk.

FYI: August options expire in two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

Buy-the-Dip Trigger @ 92.25

- Suggested Positions -

buy the AUG $95 call (GMCR1120H95)

- or -

buy the SEP $100 call (GMCR1117I100)

Annotated Chart:

Entry on August x at $ xx.xx
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on August 6, 2011


O'Reilly Automotive - ORLY - close: 58.35 change: +1.44

Stop Loss: To Be Determined
Target(s): 61.75,
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The sell-off in ORLY actually started to pause about three days ago. The big whoosh lower in the market on Thursday barely managed to push ORLY to a new relative low. Shares were showing relative strength on Friday afternoon. I would be tempted to buy ORLY now. However, we're expecting a gap down at the open on Monday. We'll try a buy-the-dip entry point instead.

The low on Friday was $56.25. I am suggesting a buy-the-dip entry at $56.50. If triggered we will not use a stop loss on Monday. The options are going to be cheap. Use a small position size to limit your risk.

FYI: A slow down in the economy, an uncertain labor market, nervous consumer sentiment should all contribute to consumers keeping their cars longer instead of buying new cars. This should keep business strong for the auto parts and service companies like ORLY.

FYI: August options expire in two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

Buy-the-Dip Trigger @ 56.50

- Suggested Positions -

buy the AUG $60 call (ORLY1120H60)

- or -

buy the SEP $60 call (ORLY1117I60)

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 6, 2011


SPDR S&P500 ETF - SPY - close: 120.08 change: -0.18

Stop Loss: To Be Determined
Target(s): 119.75, 122.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
If at first you don't succeed, try, try, again.

The S&P 500 and the SPY have been way more volatile than expected. Stocks are very short-term oversold but the market can always get more oversold. There is no way to know how low the SPY might fall on Monday as investors react to the U.S. credit downgrade news. Has it been priced in or not? I would not be surprised to see the SPY retest its Friday lows near $117 but we do not want to buy it there.

The 1,150 level on the S&P 500 index (i.e. the $115 mark for the SPY) should be support. I am suggesting we use a buy-the-dip trigger to buy calls on the SPY just in case this ETF happens to fall that low. This is a purely speculative trade and we're essentially trying to catch the falling knife here. I'm suggesting the August $118 call or the September $120 call and I estimate they will be trading around $2.25 if we're triggered at $115. We will not use a stop loss on Monday.

FYI: August options expire in two weeks. We're expecting the bounce to be fast and sharp but you may want to trade September calls for the extra time.

Buy the Dip trigger @ $115.00

- Suggested Positions -

Buy the AUG $118 call (SPY1120H118)

- or -

Buy the SEP $120 call (SPY1117I120)

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 235 million
Listed on August 6, 2011